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Matheson Electronics has just developed a new electronic device that it believes will have broad market appeal. The company has performed marketing and cost studies
Matheson Electronics has just developed a new electronic device that it believes will have broad market appeal. The company has performed marketing and cost studies that revealed the following information: New equipment would have to be acquired to produce the device. The equipment would cost $294.000 and have a six-year useful life. After six years. it would have a salvage value of about $6.000. Sales in units over the next six years are projected to be as follows: Production and sales of the device would require working capital of $45.000 to finance accounts receivable. inventories, and day-to-day cash needs. This working capital would be released at the end of the project's life. The devices would sell for $50 each: variable costs for production, administration, and sales would be $30 per unit. Fixed costs for salaries, maintenance, property taxes, insurance. and straight-line depreciation on the equipment would total $171.000 per year. (Depreciation is based on cost less salvage value.) To gain rapid entry into the market, the company would have to advertise heavily. The advertising program would be: The company's required rate of return is 8%
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